Risk-Adjusted Performance Measurement and Capital Allocation in Insurance Firms

This contribution discusses a number of ideas for using a shareholder value approach to the problems of risk-adjusted performance measurement and the issue of capital allocation. We demonstrate that, if shareholder value is to be consistently maximised, then not only the total amount of equity capital of a financial services firm (i.e. the capital structure of the firm), but also the question of how much capital is to be allocated to each of the business segments should be derived from an optimisation calculation.